By Sam Song, Data Scientist at Kizuna
A New Trading Tool
In 2018, South Korean start-up company Qraft Technologies held a stock market competition where individual stock dealers and machines competed against each other to purchase stocks at a lower price. After five days of trading, artificial intelligence won the competition, buying stocks about $10,000 cheaper than humans.
According to Qraft Technologies, their trading algorithm could read and analyze press articles and financial statements, collecting data from the real estate and stock markets, and exchange rates. Then the algorithm thoroughly looks over hundreds of distinct factors and finds portfolios that are the most profitable. Humans are not involved at all in the entire process.
What you just read might be surprising to some people, but the truth is that AI is already used in a lot of financial markets. Many financial institutions rely on AI to gain more profits and lower risks. Today, investing does not fully belong to the realm of humans anymore: a new trading tool has entered the market.
AI at Morgan Stanley
Morgan Stanley, an American multinational investment bank that manages $715 billion, is one of the large financial institutions that have introduced the usage of machine learning, neural languages and big data to their asset and wealth management strategies, providing greater benefits for their clients. Their analysts and technology department spent 18 months to build a model that is often referred as Robo-Advisor and it suggests investments that are profitable and match the clients’ preferences based on the trends in the market.
The way this model works is simple. The Robo-Advisor asks clients a series of questions to learn more about clients and their financial goals. It takes clients’ responses and applies special algorithms to suggest a portfolio that matches their financial situation and goals. Moreover, using natural language processing, the model also analyzes past emails between the asset managers and clients to inform their clients about a new investment opportunity.
The main purpose of building this sort of model, however, was not to produce technologies that will eventually outperform humans in the financial market but to make financial advisors better at what they do and augment their clients’ wealth. This comes from Morgan Stanley’s firm belief that AI will not replace humans in the financial market. They are primarily focusing on how to make the best possible outcome from combining human resources and technology.
Learn to Coexist with AI
The key here is the “coexistence” of humans and AI in finance. Rather than separating humans and technology, we need to find ways to live with technology and maximize its use. Humans can do what ultimately, they are good at and technology will allow them to discover and enhance opportunities in powerful ways. Here are some other examples of using AI in finance:
- Forex Trading
Forex market is the largest financial market in the world with a daily volume of $6.6 trillion, which surpasses that of the stock market. One of the disadvantages of this market is that there are high risks as the price fluctuates non-stop. To minimize the risk of failure, predictive analysis is often used. With the help of machine learning, an algorithm can analyze existing trading data and massive amounts of real-time market information to predict market fluctuations. While AI makes forecasts for traders, they can focus more on making wiser overall decisions.
Obviously, the hottest topic in the beginning of 2021 is cryptocurrency, particularly Bitcoin. The cryptocurrency market differs significantly from the traditional stock market in that it’s impossible to predict the market and the prices keep skyrocketing and crashing. In this highly volatile market, AI uses sentiment analysis to evaluate the sentiment of the market about cryptocurrencies based on social media and press news. And then it uses machine learning to detect patterns in multiple perspectives regarding price and volume. However, there still is a lot to be improved in this specific market as the future of cryptocurrency is full of uncertainties.
Warning: Don’t Get Your Hopes Up!
“There isn’t a single formula. You need to know a lot about business and human nature and numbers … It is unreasonable to expect that there is a magic system that will do it for you.” Charlie Munger, one of the most successful American investors, said. Yes, the magic formula does NOT exist.
It is true that the role of artificial intelligence in the financial market keeps growing bigger and it does look promising, but there are too many variables and risks to entirely rely on this technology. For example, AI will never be able to predict the death of a CEO at a gigantic company or the outbreak of a deadly virus like COVID-19, both of which can absolutely make an enormous impact in the market.
Whether you are a human or a machine, it doesn’t change the fact that trading is an exceedingly difficult game to win. The best thing we humans can do is remain open-minded and receptive to the changes technologies are bringing and adapt to them to increase chances to survive in this game of long odds.